Simply put, no. Just because prices are rising, does not automatically make it a bubble. There are numerous reasons for the craziness going on in the current residential real estate market.
Housing prices have been rising rapidly but it is a very different situation from the subprime crises of the mid-2000s. Here are a few of the top reasons that make this phenomenon different from the subprime crisis.
Borrowers are more creditworthy Loans are bing approved to people with larger down payments and higher credit scores. According to The Wall Street Journal (April 2, 2021) “Mortgage credit availability, a measure of a lenders’ willingness to issue mortgages, is near its lowest level since 2014, according to the Mortgage Bankers Association (MBA)”
Housing Supply Inventory is extremely lo9w. There are a few key reasons for this as well. The most current is that people felt uncomfortable having strangers coming through their homes during the Covid pandemic. More importantly, this shortage has been building since the subprime crisis. Homebuilders have been pulling back on the number of homes they build. The number of building permits and home starts has been decreasing since the mid-2000s. Homebuilders have been reluctant to build since then.
Financially stronger buyers Homeowners have more equity in their homes. According to Fortune, “By the end of 2007, there was more than $10 trillion in home equity, but more than $9 trillion in mortgage debt. Now there is more than $21 million in home equity and $10 trillion in mortgage debt.”
During the last bubble, people couldn’t pay off the massive debt they took on homes they purchased. That is not what is happening now. With the largest home purchasing group being millennials, the lack of new homes being built, and a combination of the pandemic, remote work, and low-interest rates, this has resulted in even more people buying houses.
Supply and demand. Short supply + high demand drives prices higher.
At present most analysts don’t believe we are in a bubble. However, time and behavior will ultimately determine the outcome. Americans do sometimes take things to the extreme.